Tag Archives: retirement

Tips for a Successful Early Retirement

When would you like to retire? Even if the answer is later versus sooner, most of us would like the freedom to decide. To do this, consider what it would take to create financial independence in retirement. Here are some ideas to help plan for an early retirement.

  • Start early – Establish your desire to retire early as soon as possible. Have a discussion with your spouse and loved ones to ensure you have the same retirement date goal. With this stated goal, meeting savings targets and establishing spending priorities get much easier.
  • Know what you want to do – Have you always wanted to visit national parks? Do you have a passion for art? If you have a dream that can be fulfilled in retirement, it makes any hardships to get there more tolerable. Once you set retirement goals, creating a plan to get there will have more meaning.
  • Pay yourself first – People who retire early have higher savings rates than most of us. Consider saving in excess of 10% of your earnings. To do this might mean holding off on a big vacation once in a while or delaying a major home improvement or purchase. While a hardship, knowing the long-term dividend makes it worthwhile. The larger your savings become, the more flexible you are in acquiring assets that generate more wealth for you.
  • No debt and credit cards paid in full – It’s hard to retire early if you are making large loan payments. Having a mindset to save money before you buy something versus taking out loans is the way to go for prospective early retirees. Why pay the credit card company interest when you could use that money during your non-working days?
  • Financial independence mindset – Save enough to not have to worry about Social Security or other government programs to take care of you. Said another way, never over-spend your own resources as you will need to depend on yourself and not others for your financial independence.
  • Use common sense when investing – Many investment alternatives may no longer make financial sense when compared to the income potential of the underlying asset or property. For example, if you own rental property, determine if the cash flows create a reasonable rate of return for the price you paid for the property. If you use common sense, more of your investments may help generate income in retirement.
  • Other resources – Go through a retirement planning process with a qualified expert. This exercise can help you understand what your projected financial needs will be during your retirement years. Project your potential savings. Look into other sources of projected income from pension plans and retirement savings accounts. Create an estimate of possible Social Security benefits. Understand what other resources will be available to you during retirement.

While this list is not meant to be all-inclusive, it should help start the conversation toward your early retirement dream. Remember to ask for help to understand your situation and to develop your own personal plan.

What to Do With Your Social Security Statement

The Social Security Administration is now doing a better job in sending out earnings reports by mailing paper statements to workers every five years beginning at age 25. The reports are also available online at https://www.ssa.gov. These reports recap historic earnings and contain an estimate of potential benefits.

When you receive your report, spend a few minutes reviewing the statement. Here are some suggestions on how to do this.

  • Review your earnings history – Towards the back of the report is a recap of your earnings record. This should accurately reflect reported earnings on your tax return. This number is a summary of all your earnings subject to Social Security as reported by your employer on your W-2 forms. But if you are self-employed or have many employers, you must make sure that the income properly reflects what you earned.

Action: Employees: Pull out your W-2s and make sure the totals match. Self-employed: Pull out your tax return and confirm totals match. Review history: Review historic figures as well. Your Social Security benefits use your full work history to calculate future benefits.

  • Review your potential retirement benefits – The Social Security statement will provide you with an estimate of your benefit amount using current dollars and current work history. The value of your benefit will show three benefit amounts. One for the minimum retirement age of 62, one for the maximum amount if you start your benefits at age 70, and one for your full retirement age between the ages of 65 and 67.

Action: Consider these monthly benefit amounts in terms of your retirement plan to help create a realistic picture of what you will have available to you when you retire.

  • Note other benefits – Remember, Social Security is not just about your retirement benefits. There are also estimates presented for disability and surviving family benefits. Please review these estimates to understand the potential benefits these programs may provide.
  • Remember current benefits are just estimates – The benefits noted on this statement are estimates. Actual benefit amounts rise with inflation, change with tax laws, and adjust with your future earnings. Your benefit statement will show you the assumptions used in creating your estimated amounts.

Action: Review the assumptions used by the Social Security Administration. Pay special attention to the future earnings used by them to create the benefit amounts. If you do not think they are accurate, you may need to create revised estimates with more accurate assumptions.

Should you find any errors in the statement correct them immediately. The last page of the statement provides a means for doing this.

Multiple Retirement Accounts? Considerations Before Consolidating

Is your retirement portfolio a mess? Sometimes a natural result of changing jobs several times over your lifetime can be an accumulation of several retirement accounts. For example, you may have three 401(k) accounts, a Roth IRA and a couple of traditional IRAs.

Is it best to leave everything as is, keeping a mishmash of accounts, or is consolidation worth considering?

If you are contemplating consolidation, here are some factors you need to take into account:

Roth IRAs – If you are in a consolidation mood, one thing to remember is you don’t want to mix the money in a Roth IRA with the money in a traditional IRA or a 401(k) account. The reason: Contributions to a Roth IRA have already been taxed, so you don’t pay tax on them when you reach retirement and begin withdrawing money. But with traditional IRAs and 401(k) accounts, the taxes were deferred so they are subject to tax when you begin withdrawals.

Nondeductible IRAs – Money placed in a nondeductible IRA, as the name implies, isn’t a deduction on your income taxes. That means you won’t pay any taxes on the money you contributed when the time comes to withdraw it either. Just as with a Roth IRA, you don’t want this money mixed with retirement money that is taxed when it is withdrawn.

Merging 401(k) accounts – Often you can merge a 401(k) from a previous employer into a 401(k) at your new employer. That kind of consolidation can be convenient because you just have one account to monitor. But it’s not always the best strategy because some 401(k) plans are better than others. Fees with the old plan might be lower than the new plan, or the investment options might be more varied. You also have the option to roll the old 401(k) into an IRA, which could be worth considering depending on your circumstances.

Don’t Let Taxes Upset Your Nest Egg!

Are you one of those who have carefully planned ahead for your retirement – setting up tax-advantaged savings accounts and researching the best place to live? You might be surprised to learn about the many tax issues that apply to retirees which should be taken into consideration when planning your retirement.

For example, you could face taxes on distributions from retirement or investment accounts, required minimum distributions from some retirement accounts and potential taxes on Social Security payments.  You also need to consider state and local income, sales or property taxes – as well as state taxes on retirement benefits and estates.

The good news is, there’s still time to anticipate and reduce some of those complications. Take the time now to properly plan your tax burden so your retirement is secure.

Financial Skills Every Parent Needs to Teach Their Child – Part 1

In the race to get our kids through high school and on to life beyond, I’ve seen a breakdown in the education system to explain basic financial skills.  Here’s the first half of a list of essential economic concepts that every high school student should understand.

How bank accounts work – Provide your child with a basic understanding of checking and savings accounts. Show them how to use checks and debit cards to pay for goods. Teach them how to access their accounts and reconcile their statements each month.

How credit cards work – Help your child understand that credit card spending actually creates a loan. Emphasize the importance of not carrying a balance by paying off credit card debt each month.

Tax basics – Prepare your child to anticipate taxes on not just purchases but on their wages as well.  Assist them to fill out their first W-4 and explain how it will affect their paycheck. When your child receives their first paycheck, walk them through their paystub to explain Social Security, Medicare, and federal and state tax withholdings.

The power of a retirement account – It might seem a little early for this, and it’s a hard concept for a young person to grasp, but explain to them the advantages of long-term savings tools like a Roth IRA.

How credit scores work – While no one but a credit reporting service actually understands all the aspects that go into creating a credit score, it’s still important to teach your child what can impact their credit and how that can affect their ability to get a car or house loan in the future. Everyone has access to a free credit report each year. Walk your child through their report.

Spending within your means – Save then spend.  This is a simple concept that is hard to accomplish. By teaching your child good habits early, you give your child a stable financial foundation for the future.

The art of saving – Part of spending within your means and saving go hand-in-hand. Teach your child healthy savings habits. Perhaps it’s setting up a separate savings account, setting aside a set amount each month or even a percentage of what they earn.

Look for the second part of this article next week!

Thinking About Retiring? Maximize Your Social Security Benefits

Roughly 10,000 American Baby Boomers turn 65 every day. One important decision they’re facing is when to file for their Social Security benefits, because that can have a significant impact on the amount they receive. For example, if you retire before you reach full retirement age, you could reduce your benefit by as much as 30%. For every additional year you stay on the job until age 70, you could raise your benefit as much as 8%.

Married couples have the added responsibility to strategize to boost the benefit amounts they receive over time.  For example, one spouse may decide to file sooner or later based on both spouses’ lifetime earnings history and health situation.  Or, depending on how they coordinate their retirement planning, one spouse might start taking a spousal benefit based on the other’s earning before reaching full retirement age.

Before filing, research all the options so as to maximize the benefits and avoid the pitfalls.